For Immediate Release
Chicago, IL – January 18, 2023 – Today, Zacks Equity Research discusses Capri Holdings Limited CPRI, American Eagle Outfitters, Inc. AEO, Urban Outfitters, Inc. URBN and Citi Trends, Inc. CTRN.
Industry: Retail - Apparel
Product cost inflation, tight labor market and supply chain issues are some of the headwinds that players in the Zacks Retail - Apparel And Shoes industry have been encountering. These, along with geopolitical turbulence due to the ongoing conflict between Russia and Ukraine, have been making things tough for companies. Evidently, demand for apparel has softened as consumers are spending more on necessities owing to soaring prices.
To navigate troubled waters, industry participants have been directing resources toward digital platforms, accelerating fleet optimization and augmenting the supply chain. Retailers have been focusing on superior product strategy, advancement of omni-channel capabilities and prudent capital investments. Backed by these initiatives, companies like Capri Holdings Limited, American Eagle Outfitters, Inc., Urban Outfitters, Inc. and Citi Trends, Inc. are better placed.
About the Industry
The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, footwear, accessories, intimates and beauty products, as well as fitness and lifestyle products for use in yoga, training and sports under various brands in domestic and international markets. Quite a few players offer bag collections, including business cases, computer bags and backpacks; leather goods, such as wallets, card cases, travel organizers, and belts; and watches, sunglasses, fragrances and ready-to-wear as well as cold-weather accessories. Markedly, companies showcase products to customers directly through their branded retail stores, mobile applications, catalogs and websites. Some industry participants also provide products via department stores, specialty retailers, third-party e-commerce sites and franchisees who operate brand-dedicated stores.
4 Key Trends to Watch in the Retail - Apparel And Shoes Industry
Pressure on Margins to Linger: The industry is quite fragmented, with companies vying for a bigger slice of the pie on attributes such as price, products and speed-to-market. In a bid to address these, a significant number of players in the industry have been investing in strengthening their digital ecosystem and delivery capabilities. While these endeavors bolster sales, they entail high costs.
Apart from these, higher marketing, advertising and other store-related expenses might compress margins. Of late, the industry participants have been dealing with product cost inflation, a tight labor market and supply-chain issues. Nonetheless, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks as well as adopting effective pricing policies.
Soft Consumer Activity May Hit Revenues: Elevating prices and geopolitical concerns continue to pose a threat to consumer spending activity. Undoubtedly, the industry's prospects are correlated with the purchasing power of consumers. But higher gasoline and food prices have been discomforting the family budgets.
The consumer price index rose to 6.5% in December 2022 on a year-over-year basis, albeit at a slower rate when compared with the month of November. The Fed's aggressive rate hikes to tame inflation are making things tough for consumers by squeezing disposable income. Consequently, demand for apparel has softened.
Brand Enhancement, Capital Discipline: Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities. The launch of newer styles, customization options and refreshed store environments enable them to woo shoppers.
Efforts to enhance brand portfolio via marketing strategies, buyouts, innovations and alliances are likely to keep supporting players in the space. The companies have been taking steps to strengthen their financial position. In fact, they have been making every move, from managing inventory and closing underperforming stores to optimizing capital expenditures and enhancing operational efficiency.
Diversification & Digitization Key to Growth: With the change in consumer shopping patterns and behavior amid the pandemic, industry participants have been playing dual in-store and online roles. They are building an omni-channel, coming up with loyalty and marketing programs, enhancing the supply chain and providing faster delivery options, be it doorstep delivery, curbside pickup or buy online and pick up at a store, which are worth mentioning.
Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers' product preferences and growing inclination toward online shopping, companies have been replenishing shelves with in-demand merchandise and ramping up investments in digitization.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Retail - Apparel And Shoes industry is a group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #165, which places it in the bottom 34% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Versus Broader Market
The Zacks Retail - Apparel And Shoes industry has underperformed the broader Zacks Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
The industry has declined 24.8% over this period compared with the S&P 500's decline of 14.1%. Meanwhile, the broader sector has slumped 16.3%.
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 13.07X compared with the S&P 500's 17.82X and the sector's 22.54X.
Over the last five years, the industry has traded as high as 118.66X and as low as 8.8X, with the median being at 14.81X.
4 Stocks Worth Considering
Citi Trends: This leading specialty value retailer of apparel, accessories and home trends has been benefiting from the successful execution of strategies. We believe that management's focus on curated assortments and incredible values should attract customers. Meanwhile, cost containment efforts and efficient inventory management should help navigate the current environment.
Citi Trends has a trailing four-quarter earnings surprise of 266.7%, on average. The Zacks Consensus Estimate for its current-fiscal EPS has increased 4.3% over the past seven days. Shares of this Zacks Rank #1 (Strong Buy) company have declined 47.8% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here.
Capri Holdings: This global fashion luxury group has constantly been deploying resources to expand product offerings, upgrade distribution infrastructure, create seamless omni-channel capabilities and deepen engagement with customers. Capri Holdings has been reinforcing its position in the luxury fashion space and looks to maximize the potential of Versace, Jimmy Choo and Michael Kors brands through expanded products.
Capri Holdings has a trailing four-quarter earnings surprise of 21%, on average. It has an estimated long-term earnings growth rate of 11.8%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 1% and 10.6%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #2 (Buy) company have risen 12.5% in the past year.
American Eagle Outfitters: The company's efforts to rationalize inventory and contain costs are paying off. Continued strength in the Aerie brand and a solid online show bode well. This leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products has an estimated long-term earnings growth rate of 11.6%.
The Zacks Consensus Estimate for American Eagle Outfitters' current-fiscal EPS has increased 2.4% over the past seven days. Shares of this Zacks Rank #2 company have decreased 33.5% in the past year.
Urban Outfitters: This leading lifestyle products and services company reported higher sales for the holiday period. Total net sales for the two months ended Dec 31, 2022 rose 2.3% from the year-ago period. While total Retail segment net sales jumped 1%, comparable Retail segment net sales increased 2%.
The Zacks Consensus Estimate for Urban Outfitters' current-fiscal EPS has risen by a penny over the past seven days. The Zacks Consensus Estimate for current financial-year revenues suggests growth of 4.9% from the year-ago reported figure. Markedly, shares of this Zacks Rank #2 company have risen 1.1% in the past year.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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